Thursday, July 11, 2013

China's exporters' FX trading days are over

A big decline in China's export numbers took analysts by surprise yesterday.

MarketWatch: - China’s exports last month fell 3.1% from a year earlier, swinging from May’s slim 1% gain, and coming in well below a forecast 4% rise from a Reuters survey of economists.

It marked the first year-on-year drop for exports since January 2012, and, according to the Financial Times, was the worst performance since October 2009.

But as discussed before (see post), the numbers reported by the General Administration of Customs have been dramatically off earlier this year and are now falling in line with reality. The accuracy of these reports is easy to check. What a nation reports as exports should be the same figures that the trading partners report as imports. And up until recently that hasn't been the case.

Source: GS

But why would China's Customs office report inflated trade numbers? The answer has to do with fake invoicing. If an exporter presents a bogus invoice for Hong Kong dollars for example, she can then legally short that amount of HK dollars against the yuan (converting the "expected" receipt of HK dollars into the domestic currency). As the yuan appreciates against the HK dollar, the exporter makes money - and China's gradual appreciation of the yuan made this a "sure bet". If you can't sell your product, why not make money on a currency trade? Now the embarrassed authorities in China have put an end to this game, as China's export figures and other nations' imports from China finally converge.

Bloomberg: - The report follows May’s collapse in export gains after a crackdown on fake invoices that inflated data in the first four months of the year.

One reason for the weak trade figures might be that the customs agency “had to deflate trade data in June to neutralize previous over-reporting,” economists Zhi Xiaojia and Lu Ting in Hong Kong said in a report. Appreciation in the yuan this year may also be making Chinese exports less competitive, they said.
...
The customs administration has no plans to revise January-April trade figures, Zheng Yuesheng, an agency spokesman, told reporters in Beijing today. The data for those months reflects arbitrage-related trade, and current figures with respect to Hong Kong trade are true to facts, he said.

In the end the converged numbers show that export growth in China has stalled. And unless one can argue for rising domestic demand to offset exports, one should be prepared for disappointing GDP growth.